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The Price of Bad Policy

This article originally appeared in the Baltimore Sun on April 21, 2004.

With Gasoline prices rapidly rising in Maryland and across the nation, motorists are gritting their teeth and grumbling each time they visit the pump. Some politicians have begun tossing around the usual proposals that are trotted out each time there is a spike in gas prices: implementing new mandates for better fuel efficiency and technological progress, granting more drilling rights in sensitive areas, and changing environmental laws and gas taxes.

But those offerings have grown stale.

Past fuel-efficiency improvements have been undone by increased consumption, in part because the better gas mileage encourages people to drive more. Technology programs such as the hydrogen car seem more befitting of a Jetsons cartoon than serious public policy (and have been unfruitfully funded by government for about as long as that show’s been on the air). And people are understandably hesitant to lower environmental protections or cut the highway-financing gas tax.

Fortunately, Maryland policy-makers can quickly and easily give motorists a tidy price break without lowering any environmental protections, cutting highway funding or engaging in Jetsons dreaming. All they need to do is scrap a pair of state corporate welfare laws, one three decades old and one just 3 years old.

In 1974, Annapolis heard a different gasoline outcry from motorists and independent gas stations. The Nixon administration’s price-control policy prevented oil companies from passing the rising price of crude to consumers. The oil companies instead reduced imports and cut back on supplying independent stations so as to have enough gas for their own “name-brand” stations. As a result, gas lines stretched for blocks.

In the midst of the crisis - and probably at the behest of the gas-strapped independent stations - state lawmakers adopted a mandatory divorcement law. The measure prohibits oil refining companies such as Exxon and Texaco from owning and operating retail stations in Maryland; instead, independent franchisees hold all of those stations.

It is unclear what the General Assembly intended for the law to do. The measure hurts consumers because the gas they purchase undergoes a double markup - one to profit the refiner and the other to profit the retailer. Several academic studies have examined Maryland and the few other states with divorcement laws and found the prohibition leads to higher prices for consumers. But the law certainly does benefit the owners of retail stations because they don’t have to compete with low-overhead, refiner-owned stations.

State lawmakers heard a second gasoline outcry in 2001 - this time, just from retailers. Convenience stores with discount gas, such as Sheetz and Wawa, were expanding rapidly in Maryland, and grocery stores and shopper’s clubs also were entering the market. They bought gasoline at low wholesale prices because their high sales volume enabled them to cut deals with suppliers. The retailers then sold the gas at low markups in order to lure people into their stores.

Consumers loved the savings (and the soft pretzels), but the traditional retailers hated the competition and cried out for relief. Annapolis responded, prohibiting individual retailers from selling gas at below a statewide average “wholesale price.” As with its 1974 counterpart, the 2001 law hurts consumers but benefits retailers by dampening price competition.

With two simple excisions of state law, Maryland policy-makers could cut more than a nickel off the price of each gallon of gas - a statewide savings to consumers of about $125 million a year.

But if they do so, the politicians will likely see another cut - in their campaign contributions.

Station owners contributed thousands of dollars to state lawmakers’ campaigns in 2002 (and retained Annapolis über-lobbyist Bruce C. Bereano to shepherd though the 2001 legislation). No doubt they would feel much less generous toward lawmakers who want more competition at the pump.

Instead, retailer supporters will defend the anti-consumer laws by saying the measures prevent retailers from engaging in vicious price-cutting competition.

In 2001, Del. Van T. Mitchell, a Charles County Democrat, praised the wholesale law for “leveling the playing field” and “protecting the little guys.” Fellow Democrat Del. James W. Hubbard of Prince George’s proclaimed the measure would “make it competitive across the board for everyone who sells gasoline.” The former governor and current state comptroller, William Donald Schaefer, sent a letter to Maryland newspapers claiming the law is “good for the consumer.”

Perhaps as gas prices move toward $2 a gallon, Marylanders might think more price competition between retailers would be even better for the consumer.